Description
This is my next installment in "the twelve days of Christmas, a short sellers version". Fresh Markets is a supermarket trading at over 2 times revenues. Traditional supermarkets trade at around 25% of sales, with whole foods at 100% of sales. Think of the company like a mini-WFMI-- organic, high-end, and expensive. Evidently they have a good meat counter. Their returns on assets are better than whole foods', as their supermarket size is smaller, though there is no reason that WFMI couldn't open the identical box with better returns due to its economies of scale, should it choose to do so. In other words, there are absolutely no barriers to entry.
The returns are as follow, assuming no degradation as the company enters new markets or competitive pressures increase:
| investment |
4.00 |
| sales/store |
10.50 |
| ebitda margin |
0.13 |
| depn/store |
0.33 |
| ebit |
|
1.04 |
| tax |
|
0.42 |
| net |
|
0.62 |
So, if the company were to build all 500 stores that it claims that it can, it would be producing $400m more of ebit before new regional and corporate overhead. Let's say that this overhead only increases 150% despite a 400% increase in stores, and that gives us potential ebit of $425m (, on an enterprise value of $4 billion. so the company is trading at 9x ebit, if every one of their stores were already built, and if they sustain operating margins that are twice that of most of their larger competitors. In other words, valuation is pretty stretched.
But maybe this concept is so great that it kept growing all the way through the recession? Nope. Despite the fact that its stores ae still ramping up, it reported -1.5% comps in 2008 and -1.1% in 2009. It also reported -3.9% comps in the first 9 months of 2009, implying a very good quarter in 4q09 (6.2%). This, in turn, implies a much tougher comp in Q4 2010, after a 4.6% comp for the first nine months of the years, though the "street" is ignoring this dynamic.
Most of the shares are owned by various members of the founding family, and it would be rational to expect them to sell more shares at twice the price that they sold their initial shares. It would also be reasonable to expect analysts with target prices 15% below the current trading level to downgrade the stock.
We can append this debate to the "1999" discussion. But, seriously, do you think that buying a supermarket at 55x earnings makes sense, even if it is growing its store base ten percent a year?
Catalyst
Q4 comps disappoint
sell-side downgrades
secondary offering
negative second derivative in insanity index